A recent survey by GOBankingRates.com showed that 63% of Americans do not feel it will be possible to retire around age 65. Most of this uncertainty stems from a lack of retirement savings and an increase in the cost of things like groceries and real estate.
If you’re worried about how housing costs will affect your retirement planning, learning how to budget for rent during retirement is essential.
Renting vs. Ownership
Most people think about owning their home by the time they retire. However, renting can be a better option for some retirees.
“Renting offers greater financial flexibility, as you’re not tied to a mortgage, property taxes and maintenance costs,” said Joseph Melara, owner of Residential Brokers in Palm Desert, Calif. “This flexibility can be advantageous in retirement when your income may be fixed.”
As you get older and your family dynamics change, you may not want or need the larger house you lived in when you were younger.
Renting provides you with flexibility. You can move to a more walkable location, live close to your children or live in different places during different times of the year. You also can choose a more accessible home that may be easier to get around as you age. However, if you already have paid off the mortgage on your home, it could be a more difficult decision.
However, even with the benefits that come from renting in retirement, there are things to consider about owning your own home. Homeownership builds equity over time, which can serve as a source of wealth and a potential inheritance. Renting does not provide this long-term wealth accumulation.
How To Budget for Rent
Learning how to budget for rent is essential at any age, but it is especially important in retirement because your income might look completely different than it did during your working years. First, you should understand how much you can afford. Next, consider other costs associated with renting. And if needed, adjust your budget.
Understand How Much You Can Afford
Understanding how much you can afford to pay is the first step in budgeting for rent. There are many ways to budget, but one popular one is the 50/30/20 rule, which involves dividing your take-home pay into categories: needs, wants, and savings/debt. From your after-tax income, you would allocate 50% to needs, 30% to wants and 20% to savings and debt payments.
Needs are necessary for survival and basic living, like housing, food, utilities, healthcare, childcare and transportation. Wants are expenses that are not essential but improve your life — such as vacations, eating out or entertainment. Savings and debt repayment can include things like an emergency fund, retirement contributions, a home and paying off credit card balances or student loans.
Say your take-home pay during retirement is $4,000 per month. Using the 50/30/20 rule, you would allocate $2,000 to needs, $1,200 to wants and $800 to savings and debt. To figure out how much you can afford to pay in rent, you should calculate how much you spend on your other needs — e.g., food, healthcare and transportation. Whatever is left from $2,000 could be spent on rent. Of course, you will need to consider the local rental market to ensure you can find something within this budget.
The benefits of the 50/30/20 rule are that it is simple and easy to keep track of your spending. The 50/30/20 rule may also be less intimidating because it is simpler than other budgeting methods. It allows you to set boundaries while still treating yourself. However, the 50/30/20 rule can be difficult to adhere to if you live in high-cost areas or have low income.
“One of the hardest parts of budgeting for your retirement if you’re a renter is accounting for rent increases,” said Leonard Ang, CEO of iPropertyManagement. “While homeowners may need to pay more in property taxes and insurance as the years go by, they still have much more predictable housing costs than renters do.”
Ang said a good rule of thumb is to budget for at least a 3% increase in rent each year, but you’ll want to do some research on your area and pay careful attention to the rental market in order to plan for this.
Consider Other Costs Associated With Renting
Once you know how much you can afford to pay for rent, you should factor in other costs. When renting an apartment, you may need to put down a security deposit. There also might be an application fee to apply for the apartment.
While renting, you should have renters insurance, which will be an additional monthly expense. You also might be responsible for paying utilities, though some apartments include some or all utilities in the monthly rent. Also, consider any furniture or decor you may want to buy for the apartment.
Adjust Your Expenses
If your budget doesn’t match up well with the local rental market, you’ll need to adjust other areas of your spending like groceries, entertainment or dining out. Once you figure out your budget, you can see how much money you would need to reallocate to rent to afford rent in your area.
The Bottom Line
Although renting may not be what you envision in retirement, it can be a wise financial and lifestyle choice. Just make sure you prepare in advance for the expense of renting during retirement by budgeting and planning.
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